Aussie lifts as yields lure funds
The Reserve Bank of Australia’s ability to influence the direction of its currency is in question.
Even after twin RBA interest-rate cuts this year, options traders have become the least bearish on the Australian dollar since 2014, while the median year-end analyst forecast has risen almost 3 per cent this month to 73 US cents. The Aussie’s 9.7 per cent total return in the past six months came as the pound plunged and most European currencies stalled.
The premium traders pay for three-month contracts giving the right to sell the Aussie over those to buy reached 1.17 per cent at the end of last week, the lowest on a closing basis since July 2014. Photo: Glenn Hunt
Investor demand is holding strong as yields on Australia’s 10-year bonds after accounting for inflation are higher than in the US and compare with negative levels in Europe and Japan. The Aussie is set to remain overvalued as the US presidential election and the Federal Reserve’s reluctance to raise interest rates hold back the greenback, according to Amundi SA and Nikko Asset Management Co.
“I see no real reason to be short in the Australian dollar at the moment,” said Roger Bridges, the chief global strategist for interest rates and currencies at Nikko Asset Management’s Australian unit in Sydney, which has about $US16 billion in assets. “It’s probably a little bit overvalued at the moment, but I really can’t see it going down.”
The Aussie bought 77.10 US cents at 5pm in Sydney Tuesday, close to its average level of 76.63 in April, before the RBA eased in May and August. The price of iron ore, Australia’s biggest export, has surged almost 25 per cent since early June, contributing to the currency’s resilience.
While swaps traders see an even chance of another rate cut by year-end, Australia will continue to stand out as central bank asset-purchase programs from Japan to the euro area keep yields low worldwide. Japanese investors bought 145.3 billion yen ($US1.45 billion) of Australian debt in the first six months of the year, according to data from the Bank of Japan.
“Changes to expectations about central banks’ policies continued to have an important influence on global exchange-rate developments,” the RBA said Tuesday in minutes of its August 2 meeting, when the benchmark was reduced to 1.5 per cent.
No hurry to cut again
RBA governor Glenn Stevens and his board have signalled a preference for a weaker currency to encourage growth in services like tourism and education amid the winding down of a once-in-a-century mining boom. While the economy has grown faster than the central bank predicted, core inflation and wage growth are both at record lows.
In his final speech before retiring as central-bank governor, Stevens said a week after the latest easing that “the ability of monetary policy alone to boost growth sustainably is very likely to be a good deal more limited than we might wish”. Australia isn’t alone. The New Zealand dollar surged after the central bank cut the key rate to a fresh record low last week, while the yen rallied on July 29 when the BOJ failed to expand stimulus as much as markets expected.
The RBA is unlikely to be in a hurry to ease again, said James Kwok, London-based head of currency management at Amundi, which oversees more than $US1.1 trillion.
“The US election uncertainty may have contributed to the disconnection between monetary policy and currency performance,” he said.
Options traders have reduced positions benefiting from a weaker currency. The premium traders pay for three-month contracts giving the right to sell the Aussie over those to buy reached 1.17 per cent at the end of last week, the lowest on a closing basis since July 2014. The premium was at 1.21 per cent Tuesday.
ABN Amro Bank last week closed its trading recommendation that sought to profit from the Aussie’s decline. The currency is unlikely to weaken toward 72 US cents at the end of the third quarter, as earlier predicted by the bank, said Roy Teo, its senior currency strategist in Singapore. It’s set to end the year at about 74 US cents as the RBA will probably ease again as soon as November, he said.
“If they do not ease later this year, the Aussie is likely to head higher and that will complicate the exports and inflation outlook in Australia,” Teo said.